What started as a typo in an online forum has developed a real meaning of its own.
A well-known Bitcoin (BTC +0.16%) day trader started the “hodl” meme in 2013. In a whisky-fueled forum post entitled, “I AM HODLING,” the trader said that he was a bad day trader and would simply hold his Bitcoin for the long run.
The expression quickly spread throughout the crypto community. It has found many uses in various forms since then with statements such as, “I am a hodler because I hodl my cryptocurrency. Hodling is my main strategy.”
Some enthusiasts have even accepted HODL as an acronym, meaning to “hold on for dear life.” The term is also related to “diamond hands,” which means that you have an unbreakable grip on the crypto you own.
Hodl as a strategy
The idea of hodling crypto is to buy a cryptocurrency and hold it for a very long time. To do it right, you shouldn’t take profits when your crypto is skyrocketing, and you shouldn’t back out when prices are going down.
Buy-and-Hold Strategy
It’s essentially the opposite strategy from day traders trying to maximize their cryptocurrency profits on a short-term basis. Traders buy and sell their crypto all the time. Hodlers only buy and then buy more as opportunities emerge.
How hodl works
GameKyuubi’s original post still offers one of the best explanations of this philosophy:
“I SHOULD HAVE SOLD MOMENTS BEFORE EVERY SELL AND BOUGHT MOMENTS BEFORE EVERY BUY BUT YOU KNOW WHAT NOT EVERYBODY IS AS COOL AS YOU,” GameKyuubi wrote, caps and all. “In a zero-sum game such as this, traders can only take your money if you sell.”
In other words, market timing is difficult and risky, and making the wrong moves will lock in paper losses that may otherwise disappear over time. So you buy, you hold on for dear life -- hodl -- and you build wealth in the long haul.
Pros and cons of hodl
Hodling sounds a lot like the long-term buy-and-hold strategy The Motley Fool employs in the stock market. Generally speaking, we recommend owning stocks for at least five years. The wealth-building benefits of compound returns make a bigger difference in a longer time frame. The same philosophy should work for high-quality cryptocurrencies as well.
On the downside, not every crypto ticker is built to last. There are thousands of cryptocurrencies on the market today, and the number of long-term winners in that group is much smaller. Some cryptocurrencies are jokes, others are money-making frauds, and another group has all the right intentions but flawed technical designs.
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Crypto hodl vs. trading
Come back in five years, and you’ll find that some of today’s hottest cryptos never quite made it to the moon, and that diamond-hand hodlers lost a lot of money.
Hodling crypto only works with long-lived digital currencies that can build value over time. When you hodl one of the short-lived cryptos, that promised trip “to the moon” turns into a deep-sea dive with no return ticket instead. In a perfect world, you’ll never invest in any of these cash-burning crypto projects. In reality, you’re better off selling some cryptos before they burn too much of your money.
So hodling crypto is not a golden ticket. It’s a healthy part of a sensible cryptocurrency investing strategy when combined with serious research into the quality and long-term prospects of your cryptocurrencies. Most of us will do better with a well-researched hodling portfolio than a short-sighted day trading approach.
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